LONDON—ICAP, the world’s largest interdealer broker, said it was cutting both jobs and its forecast for full-year profit because of weaker trading linked to the euro zone crisis. Chief executive Michael Spencer also said on Wednesday that regulators were making slow progress on reforms that could boost earnings at ICAP and rival firms.
ICAP said profit for its year to end-March should be toward the upper end of analyst forecasts in a 336-358 million pounds ($530-$565 million) range, down from its prediction in November of a profit of 358-390 million. “The continued uncertainty in the euro zone and constraints on market liquidity, together with customers reducing risk before the year-end, led to more subdued volumes,” the bond, currency and swaps broker said.
ICAP said while it was investing and hiring in growth areas such as financial futures and commodities, it had cuts costs elsewhere by 20 million pounds so far in its 2011/12 year. A month ago, British rival Tullett Prebon said it was to take new cost-cutting measures and that previous steps to reduce costs would lead to a 10 million pound charge for its 2011 results. With ICAP having been widely expected to cut profit guidance, investors cheered the news it expected an outcome toward the top end of market forecasts and ICAP shares were up 7.0 percent at 1130 GMT.
In September 2010, ICAP launched iSwap, an electronic swap system, in anticipation of Dodd-Frank reforms in the United States that will force swaps to be traded electronically. Implementation of the bill is taking longer than expected. Spencer said the lack of clarity was holding back his business. “We have not yet seen the full rules and the growth of iSwap has been suppressed, which has been disappointing and frustrating.”
ICAP, and rivals BGC Partners, GFI Group, Tradition and Tullett Prebon, are keen to tap Dodd-Frank and parallel reforms in the Europe that will overhaul the $600 trillion over-the-counter market. Regulators want to force the opaque OTC markets to use exchanges, electronic trading platforms and clearing houses to tackle some of the problems that arose with OTC derivatives after the collapse of Lehman Brothers in 2008. The brokers, who already trade OTC products on behalf of banking clients, see themselves as the natural providers of the mandated trading platforms, known as swap execution facilities. But U.S. regulators have yet to draft the precise rules, despite the act having been signed into law in mid-2010. “All we have been able to do is make our best effort to estimate the rules and then act first and I believe ICAP has done that,” said Spencer.
ICAP said its trading volume in electronic markets was down 7 percent at $730 billion in the fourth quarter of 2011, while its core voice-broking business recorded lower activity overall. “The numbers represent a sharp decline relative to ICAP’s November expectations, but the market largely anticipated the weak trading outlook, and ICAP now expects to reach the high end of the analyst range,” Berenberg Bank analyst Richard Perrott said.
“Revenue outlook remains uncertain so we prefer to remain cautious on the top line, but we expect ICAP to continue to focus on trimming its cost base,” Citigroup analyst Nese Guner said. Paul Measday, an analyst at JP Morgan, said: “The overall picture is somewhat mixed. There has been a recent pick-up in activity, but echoing Tullett last month, the cost-cutting suggests to us that management expects that the market environment will remain challenging for the time being.”